Fitch: US money funds dip toes back into Europe

FRANKFURT, Germany (AP) — The big U.S. money market funds are loaning more to banks in the 17-country eurozone as fears ease over the continent's debt crisis and shaky financial system.

Fitch, the credit ratings agency, said Monday that the 10 largest U.S. funds increased their exposure for the third straight month in September. The funds now have 10.6 percent of their holdings in credit to European banks, up 16 percent from August.

The agency said that is because actions by central banks have reduced turmoil and volatility in the financial system. The European Central Bank has said it is willing to buy the bonds of indebted governments on financial markets, lowering their borrowing costs and the chance they might default.

The U.S. Federal Reserve is also buying financial assets to increase the supply of money in the U.S. economy and support growth.

Money funds take cash from investors and put it to work in credit markets — by lending to banks for short periods of time, for example.

The money funds had pulled back from lending to European banks because of fears they might run into trouble and not repay the money. But now fund managers are making modest increases in the amounts of bank commercial paper and CDs that they hold.

European banks are troubled because many are still working off big losses on government bonds that have fallen in value and on loans made during soured real estate booms in countries like Spain and Ireland.

Despite the recent increase, money funds' exposure to Europe remains just 70 percent what it was before the crisis, and won't soon return to earlier levels, Fitch analysts said.

That's because of lingering investor caution toward the eurozone. It's also because banks are relying less on the more volatile forms of getting credit. Borrowing from money funds can be volatile for a bank because borrowing rates can fluctuate. As a result, some banks are focusing on safer ways of financing, such as attracting more customer deposits.

The Fitch Ratings study measured the lending of the top 10 prime money funds by size, with $646 billion under investment, or about 45 percent of the $1.4 trillion in total U.S. money fund assets.